Refinance vs. Renewal
Two very different options with very different costs. Here's how to decide which one is right for your situation.
Refinancing
Breaking your current mortgage before the term ends to get new terms. This triggers a penalty and requires re-qualifying (including the stress test).
Common reasons: Access equity, consolidate debt, get a better rate mid-term, change amortization.
Renewal
When your term naturally ends and you negotiate new terms. Can be with your same lender (no stress test) or a new lender (stress test required).
Common reasons: Term expired, shop for better rate, adjust mortgage features.
Side-by-Side Comparison
| Factor | Refinance | Renewal |
|---|---|---|
| Timing | Any time (mid-term) | At term maturity only |
| Penalty | Yes — IRD or 3 months' interest | No penalty |
| Stress Test | Always required | Only if switching lenders |
| Rate Category | Uninsurable (highest tier) | Keeps current category |
| Access Equity | Yes — up to 80% LTV | No — same balance |
| Change Amortization | Yes — reset up to 30 years | Continues existing schedule |
| Legal / Appraisal Costs | $1,000-$2,500 | Usually $0 |
| Typical Total Cost | $5,000-$30,000+ | $0 |
Understanding the IRD Penalty
The Interest Rate Differential (IRD) is how lenders calculate the cost of you breaking a fixed-rate mortgage early. It compensates them for the interest they'll lose.
IRD Calculation (Simplified)
IRD = Balance × (Your Rate - Current Rate) × Remaining Term
Example:
$400,000 × (4.50% - 3.00%) × 3 years = $18,000
Big bank warning: Major banks often use their posted rate (not the discount rate you actually received) in the IRD calculation, which inflates the penalty. Monoline lenders typically use your actual contract rate, resulting in a lower penalty.
Variable-rate penalty: Only 3 months' interest (no IRD). On a $400,000 balance at 5.45%, that's approximately $5,450. This is why variable-rate mortgages offer more flexibility.
Impact on Your Total Cost of Credit
The decision between refinancing and renewal isn't just about the rate — it's about your total cost of credit over the remaining life of your mortgage.
Refinancing: One-Time Cost, Long-Term Savings
A $15,000 penalty feels steep — but if refinancing drops your rate by 1.0% on a $400,000 balance with 20 years remaining, you save approximately $45,000 in total interest. Net cost of credit reduction: $30,000.
Renewal: Free but Potentially Costly
Renewing costs nothing upfront. But auto-signing at a rate 0.30% above market on $400,000 adds $6,000+ in extra interest over a 5-year term. Over multiple renewals, this compounding inertia can increase your cost of credit by $20,000-$40,000.
Rule of thumb: Calculate your total cost of credit under both scenarios before deciding. A penalty today might save you far more in total interest tomorrow.
When to Choose Each Option
Choose Refinancing When:
- You need to access home equity (renovations, investments)
- You have high-interest debt to consolidate (credit cards at 19-29%)
- Rates have dropped enough that the cost-of-credit savings exceed the penalty
- You want to extend your amortization for cash flow relief
- Your penalty is minimal (near end of term)
Choose Renewal When:
- Your term is naturally ending (no penalty)
- You want to negotiate a better rate to reduce your cost of credit
- You don't need to access equity or change your mortgage amount
- You want to avoid the stress test (stay with same lender)
- You want to switch from fixed to variable (or vice versa)
Common mistake: Never auto-sign your lender's renewal offer without shopping around. Lenders count on inertia — their initial renewal offer is almost always higher than what you can negotiate or find elsewhere.
Frequently Asked Questions
Camilo Rodriguez
Founder of Mortgages Lab & Mortgage Expert
Camilo Rodriguez is the Founder of Mortgages Lab, a licensed mortgage broker with over 20 years of experience helping Canadians achieve financial freedom. He has trained 100+ mortgage agents across Canada, served as a former Mortgage Manager for TD Canada Trust, and was Past President of the Canadian Mortgage Broker Association – BC. He is the author of "From Debt to Zero," a guide to becoming mortgage free.
P.A.Y.O.F.F™, L.A.B™, M.A.P™ are Trademarks of Mortgages Lab®
Financial Disclosure
This page contains informational content only and does not constitute financial advice. Mortgage rates shown are sourced from publicly available lender data and may change without notice. Always verify rates directly with the lender. Mortgages Lab may receive compensation from partner lenders, which does not influence our editorial content or rate rankings. Built on Real Experience — 20+ years of working with real mortgage scenarios and helping Canadians achieve financial freedom.
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